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Cyber threats leap to top of manufacturers' list of risks

Cyber threats leap to top of manufacturers' list of risks

Cyber security is the top concern for more than nine out of 10 manufacturers surveyed, BDO USA L.L.P. said Tuesday, up 44% from 2013 and marking the first time cyber risk cracked the list of top 10 risk factors.

The Chicago-based accounting and consulting firm said manufacturers' intellectual property, data and products have become prime targets for cyber criminals as data and connectivity transform the industry.

More than 92% of manufacturers in BDO's 2016 Manufacturing RiskFactor Report cited cyber security concerns in their disclosures to the U.S. Securities and Exchange Commission this year.

“As the industry races toward the next frontier, manufacturers must strike a balance between progress and security,” Rick Schreiber, partner and national leader of the manufacturing and distribution practice and National Association of Manufacturers board member, said in a statement. “Data analytics and the internet of things may spur the next industrial revolution, but with that comes increased exposure to cyber risk. Manufacturers still have some catching up to do to adequately protect their data, customers, products and factory floors.”

The report, which analyzes the latest 10-K filings from the largest 100 publicly traded U.S. manufacturers across five subsectors, found that 91% also named operational infrastructure risk, including information systems and implementation of new systems and maintenance.

Other top concerns include federal, state and or local regulations; labor concerns or underfunded pensions; competition and consolidation in manufacturing; and commodity or raw material prices.

Nearly all manufacturers cited competitive pressures this year. BDO said the push to get leaner and meaner and keep up with emerging technologies, like the internet of things, machine learning and virtual reality, appears to be contributing to related business risks.

Ninety-one percent worry about inability to properly execute corporate strategy — including cost reduction, capacity expansion or improving efficiencies. And 87% report risks around their ability to develop and market quality products that meet customer needs.

BDO said these pressures could drive manufacturers to pursue mergers and acquisitions in an effort to achieve scale and new capabilities. After a sharp drop in deal flow in the manufacturing sector at the end of 2015, strategic and financial buyers alike are showing an interest in M&A but remain cautious about lower valuations and still-challenging economic fundamentals.

Ninety-two percent of manufacturers cite the inability to manage, complete and integrate current or future M&A or joint ventures this year, BDO said, up from 88% in 2015.

The strength of the dollar, which reached 12-year highs in November, is contributing to lower-than-anticipated profits and creating challenges for manufacturers looking to increase international business. Mirroring these trends, 94% of manufacturers noted threats to international operations and sales, up from 93% last year and 87% in 2013. And 92% cited currency risk, including exchange rates and fluctuations.

Federal, state and local regulations are highlighted by 99% of manufacturers in their annual filings and are among the top two risks for the fourth year running. In particular, environmental regulatory risks are top of mind this year, cited by 95% of manufacturers. Forty-two percent mention regulations around emissions standards.

Dawn Williford, south region leader of BDO's risk advisory services, noted that compliance and competitive advantage are not mutually exclusive.

“When done right, risk management can be more of a boon than a burden to manufacturers by reducing costly errors and enhancing the operational foundations of the business,” Ms. Williford said.